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Rental property - do your (home)work

Mar 18 2012 15:49 Elma Kloppers

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Johannesburg – If there was ever a right time to buy a house it is now, said Warren Buffett, chairperson and chief executive of Berkshire Hathaway in a recent interview on CNBC.

Buffett, who is worth around $44bn, is the second-richest man in the world, according to US magazine Forbes.

Buffett considers houses the top investment currently, but then not any old house – buy bargain homes that can be financed with 30-year loans, with the idea of letting them out.

He considers it a wonderful plan to buy a few hundred thousand such houses and obtain home loans at very low interest rates.

In the US interest rates can be fixed for long periods, which makes the low cost of finance advantageous.

This is what Buffett would have done if he knew where he would find himself over the next 10 years.

He says five years ago people could not buy houses fast enough because they thought prices would continue to rise, but now they are not buying because they think prices will continue to fall.

“This creates an attractive asset class for residential investors.”

As far as his own home is concerned, Buffett does not flaunt his wealth. According to Forbes he still lives in the same relatively modest home for a billionaire in Omaha, Nebraska, that he bought in 1958 for $31 500.

Rode & Associates property valuer and economist Erwin Rode agrees with Buffett that this is the right time to buy in the US, but he says this in no way applies to SA’s housing market.

“In the US there has been a significant correction in house prices and prices have in real terms dropped close to their long-term trend line, which makes it a good time to buy.”

South Africa’s housing market has not experienced such a correction, according to Rode.

First National Bank property analyst John Loos says that the South African housing market still has to reach the bottom of the cycle. “Although it is currently a better time to buy than four years ago, it's still not the best time.”

Magnus Heystek of Brenthurst Investments says the best time to buy any asset is when the market is down, not when it is booming and everyone is talking about it and boasting good results. “It’s like waiting for shares to reach record lows and then to buy them.”

Heystek says the best profits are generally made in the initial stages of a revival, not the final.

SA’s residential investors have still not regained the healthy appetite for buy-to-let properties seen before the recession.

The percentage of investors in rental properties was an uninspiring 8% of all buyers in the fourth quarter of 2011, as shown by FNB’s property barometer. This is a mere drop in the ocean compared with the 2004 high of 25%.

Rode reckons this shows that buy-to-let investors are probably showing good sense. “Interest rates remain a huge unknown, which is one of the reasons they have not re-entered the market.”
warren buffet  |  house prices  |  investments
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